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Prices down, rates up, Housing starts wobble

Prices down, rates up, Housing starts wobble

July 11, 2013

Timber Industry Report
By Rick Sohn, PhD
Coquille LLC

Good news/bad news. Product prices are down and mortgage rates are up. Housing starts are lackluster, but unsold inventory is down. Seven-year trend of lumber, logs, housing, and mortgage statistics are shown below.

chart-sohn-july13

Interpretation
The housing recovery has entered a readjustment phase. Product prices have decreased one third in just two months, reacting to over-supply, from a high of $445 down to $290 per Thousand Board Feet. There has been an equally dramatic increase in the 30-year fixed rate mortgage – a half percentage point rise in the last week alone, and a and a full percentage point rise in the last 7 weeks.

Housing Starts and Building Permits are also down, compared to the regular monthly records over the last year.

In good news, Median home prices continue to inch up, but are still well below previous highs. And unsold home inventories have continued to drop, now to their lowest level in 7 years – 2.5 months.

Good news/bad news also involves log prices, which normally trail product prices. Log prices tracked here, have stayed within a $20 range between January and June, after an $89 rise from December to January 2013, and a $37 rise from October to December. But the latest drop in product prices, if it holds for the rest of the building season, suggests that log prices will drop quite a bit further in the next few months.

If you are a mill, the combination of slowly adjusting log prices and decreasing product prices creates a squeeze on net income.

Industry economic analysts at a session hosted by Northwest Farm Credit Services, expressed optimism about the future of log and lumber consumption and prices, over the next 3-5 years. However the industry itself remains skeptical, and Random Lengths this week, reported “10 reasons to be cautious about the housing recovery.” The reasons include the rise in interest rates, and a drop in the percentage of home ownership from 69.1% to 65% and an accompanying increase in apartments being built, which require only about one third as much wood as a home.

Weyerhaeuser has shown its strong optimism with the long term wood products business recently. They purchased the Longview Timber lands, located in the Northwest. This purchase, for $2.65 billion, added 1/3 to its Pacific Northwest holdings, an addition of 645,000 acres. This brings Weyerhaeuser’s total for the Pacific Northwest to 2.6 million acres, and, and nearly 21 million acres in North America.

There is a breather in some parts of the recovery, according to the economists, and the pent up demand of people to own a new house, the overall trend of the wood products industry should remain very positive over the next few years. Most likely, the slowdown in some sectors is seasonal and the result of rebalancing inventories and production that creates growing pains.

Data reports used with permission of:
1) Random Lengths. Through Sept. 2012, 2”x4”x8’ precision end trimmed hem-fir stud grade from Southern Oregon mills. Starting Oct. 2012, consolidated with Kiln Dried Studs, Coast Hem-Fir 2x4x8’ PET #2/#2&Btr. Price reported is Dollars per Thousand Board Feet, generally the third week of the month. One “board foot” of product measures 12 inches by 12 inches by one inch thick.
2) RISI, Log Lines. Douglas-fir #2 Sawmill Log, Average Region 3 Southern Oregon price. Current report is for the prior month, in Dollars per Thousand Board Feet of logs, Scribner Scale. The standardized Scribner Scale includes expected saw trim waste, so a log board foot is much more wood volume than a product board foot.
3) Dept. of Commerce, US Census Bureau. New Residential Housing Starts and New Residential Construction Permits, seasonally adjusted, annual rate. Current report is for the prior month. Recent reports are often revised in bold. Also, major revision made each May, reaching 2 1/2 yrs back.
4) Regional Multiple Listing Service RMLSTM data, courtesy of Janet Johnston, Prudential Real Estate Professionals Broker, Roseburg, OR. Inventory of Unsold Homes (Ratio of Active Listings to Closed Sales) in Portland Oregon, for most recent month available.
5) Freddie Mac. Primary Mortgage Market Survey. 30-year Fixed Rate Mortgages Since 1971, national averages. Updated weekly, current report is for the prior full month.
6) Mortgage-X Most recent weekly rate of 30-year Fixed Rate Mortgages, national average.
7) Zillow.com Median value of homes sold in the United States during the month, weighted according toeach area population. The Median removes the effect of outlier expensive homes, with equal numbers of homes above and below the median value each month. Revisions in bold
Issue #6-6. © Copyright Rick Sohn, Umpqua Coquille LLC.

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Go Wood: Wood Science 101 (10) – Where Does Lumber Come From?

Wood Science 101 (10) – Where Does Lumber Come From?

One of the more interesting phenomena of today’s world is the insulation we have from the source of our sustenance, or raw materials. Many modern folk would have a hard time explaining where the natural gas in their home comes from, or how bread is made, or even what the very walls around them are made of.So when Mike Wolcott sent me some nice photos of what I call a “lumber log”, that is a re-constructed log made of the lumber and bark sawn from it, I thought it a good opportunity to share just a little bit of the story of lumber.

http://www.vincentkohler.ch/billon.html

This artistic work is a nice way to demonstrate in a visual way just where lumber comes from. One sees many different sizes of boards, and a cant in the center of the log; it begins to give one a sense of how many different products can be produced from a log depending on how the log is sawn up. And the placement of all cuts, and therefore the size and value of each board produced, depends most importantly on the very first cut into the log.

In the early 1970’s, the US Forest Service developed a computer program that mathematically calculated the highest volume of lumber that could be sawn from a log of specified dimensions based on what it called the “best opening face“.  Soon, computerized sawing equipment incorporated this computer algorithm into their equipment along with scanning technology that allowed the log to be spun and scanned prior to sawing, thereby allowing the computer to determine just exactly where that first critical cut should be made. The resulting “face” of the log. then, would produce the widest pieces of lumber, and subsequent narrower lumber would be produced as the log is turned.  In the photograph above, the sawyer, or the computer he operated, determined that the best first cut would be on what is the top of the log in the picture. The cut was made just at the edges of the top piece of bark, producing a “slab” from which the top two narrow boards were re-sawn. Then, once the slab was sent on its way, the two-by-six and two-by-eight pieces (the third and fourth boards from top) were sawn and sent on to an “edger” where the square edges of the boards were formed as the rounded corners were sawn away. The log was then rotated and sawing continued on the next face, with most of the pieces in this case being sent on to a “re-saw” or a “gang-saw” to produce the narrower strips you see.

Not long after the computerized saws were capable of producing the highest amount of lumber, or “yield” from a log, technologists figured out how to allow the mill operators to assign market values to the different sizes of lumber in “value tables” built into the software. This allowed the mill operator to then produce not the highest “yield” of lumber in board feet (one board foot is equal to a square piece of wood 12 inches long, by 12 inches wide, by 1 inch thick), but the highest value of lumber in dollars based on ever-changing current lumber market values.

This system works well for softwood lumber, for which most of the value is determined by the dimension of each piece. But in hardwood lumber production, the real value of the lumber is determined by the internal characteristics of the log…the number and size of knots and other defects, the coloring and figuring of the wood, and the surface area of “clear units” in each piece of lumber. These characteristics are determined again by the sawing technique used for each log. The three most common methods of sawing hardwood logs are called “plain or flat sawn” (the most common and highest yielding method), quarter-sawn (the most popular for certain applications where highly figured wood is desired), and rift sawn (used when straight-grained lumber is highly desired).

The following is an excellent high-quality educational video from the folks at the Frank Miller Lumber Company, an Indiana lumber producer that specializes in quartersawn hardwood. It provides a nice way to visualize the sawing process one has to try to imagine when looking at a piece of lumber. http://gowood.blogspot.com/2013/07/wood-science-101-10-where-does-lumber.html

And that’s how it’s done. Show the video to your kids, and then take them to the nearest lumberyard. You might be surprised how much fun you’ll all have.

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